Starter: Fixed and Variable costs

1
Starter Fixed and Variable costs

• Write down 3 fixed and 3 variable costs you can
  remember
• Also define the term breakeven

2
The basics of break-even

• There are two types of costs
• Variable costs increase by a step every time an
  extra product is sold (eg cost of ice cream
  cornets in ice cream shop)
• Fixed costs have to be paid even if no products
  are sold (eg rent of ice cream shop)

3
Examples of variable costs

• Variable costs increase with the amount of
  production
• Raw materials
• Petrol
• Labour (paid by the hour)
• Packaging

4
Example of Variable Costs
One product costs 1 to produce
Costs of production
4
3
2
1
1 2 3 4
Production level
5
Examples of Fixed Costs

• Fixed costs remain the same no matter the
  production level
• Rent
• Business rates (tax on businesses)
• Salary based employee wages
• Insurance

6
Example of Fixed Costs
Costs of production
400
300
200
100
1 2 3 4
Production level
7
Breakeven

• The point at which a business neither makes a
  profit or a loss
• Formula

8
Why calculate break-even?

• Tom can hire an ice-cream van for an afternoon
  at a summer fete. The van hire will be 100 and
  the cost of cornets, ice cream etc will 50p per
  ice cream.
• Tom thinks a sensible selling price will be
  1.50.
• At this price, how many ice-creams must he sell
  to cover his costs?
• Calculating this will help Tom to decide if the
  idea is worthwhile.

9
Applying the formula
100 Units
10
Fruit Smoothie Breakeven Selling price - 1

• Variable Costs (per cup)
• Fruit 19p
• Milk 6p
• Yoghurt 13p
• Cups 2p
• Electricity 5p

• Fixed Costs
• Liquidiser - 15

1. Complete the breakeven table
2. Draw breakeven chart

11
Correct Answers

• Fixed costs 15
• Variable costs 45p
• Selling price 1
• No. of units to breakeven 27 cups

12
Margin of safety